Although the average turnover rate of stock funds is
117% in 2004, according to an
Investment
Company Institute
(ICI) Research Commentary, almost three-quarters of
funds have turnover less than that. About half of stock
funds actually have turnover rates less than 60% this year,
ICI reports. The reason for such a high average is that a
small group of select funds with high-turnover agendas are
creating a skewed picture. For example, if the top 200
funds ranked by turnover rate (out of a universe nearing
4,500) are removed from the calculation, the average stock
fund turnover falls more than 40%, down to 76%. These funds
then, which are meant to offer investors quick in-and-outs,
are skewing the overall average turnover rate.

Of the funds with extremely high turnover, key
characteristics are a small number of total assets and
fewer long term investors. When funds with lower turnover
are viewed, larger asset totals and more long-term
investors are noticeable characteristics.

A more appropriate way to look at turnover is to focus
on a median figure, ICI asserts. The median turnover rate
in 2004 was much lower than that of the simple average,
coming in at 65%. This number is in line with the turnover
rate seen over the past two decades, dispelling the myth
that turnover has been on the rise as a result of market
timing in a majority of mutual funds. The simple average
has risen due to momentum investing strategies, according
to ICI, but the median average has not moved in
decades.

The ICI also attempted to dispel the myth that the
median turnover rate has not risen because of the
obfuscating effects of index funds. Index funds often have
turnover lower than the average stock fund, but even when
these are removed from the calculations, the median
turnover rate is not significantly higher in 2004 than it
was in the 1980s, according to the ICI.

The ICI also stressed that it is appropriate to view
where mutual fund money is actually invested through the
use of asset-weighted turnover rates. In 2004, the
asset-weighted turnover rate for stock funds was 51%, but
two-thirds of stock fund assets were invested in funds with
turnover rates under 50%. This shows that shareholders tend
to hold funds that have lower turnover.